March 24, 2020

On May 25, 2018, the Council of the European Union has issued the Council Directive (EU) 2018/822 (DAC6)[1]. Member states will have adopted and published, by 31 December 2019 at the latest, the laws, regulations and administrative provisions necessary to comply with this Directive and shall apply those provisions as from 1 July 2020[2].

The implementation of this directive in the local (tax) legislation of each individual member state introduces an additional reporting requirement of cross-border transactions as of 1 July 2020[3]. This reporting should be filed with the tax authorities of the EU state involved which will share this information with all other EU member states. However, for a lot of Financial Institutions and intermediaries, it will be unclear what to report!

Background

EU member states find it increasingly difficult to protect their national tax bases from erosion as tax-planning structures have evolved to be particularly sophisticated and often take advantage of the increased mobility of both capital and persons within the internal market. Such tax-planning structures commonly consist of arrangements which are developed across various jurisdictions and move taxable profits towards more beneficial tax regimes or have the effect of reducing the taxpayer’s overall tax bill. As a result, member states often experience considerable reductions in their tax revenues, which hinder them from applying growth-friendly tax policies.

Spontaneous information provision

It is perceived critical by the European Council that member states’ tax authorities obtain comprehensive and relevant information about potentially aggressive tax arrangements. Therefore the directive obliges the member states to introduce legislation on the basis of which intermediaries, or (relevant) taxpayers, must spontaneously provide information about taxable cross-border constructions to the tax authorities. Such information will enable those authorities to react promptly against harmful tax practices and to close loopholes by enacting legislation or by undertaking adequate risk assessments and carrying out tax audits.

Cross border construction

For the determination of a cross-border construction subject to a notification obligation, the directive works with an annex containing essential characteristics (“hallmarks”) that may give rise to a notification. This therefore only concerns cross-border constructions that (possibly) indicate tax avoidance, because one or more of the essential characteristics are met, sometimes in combination with the main benefit test. This main benefit test means that the most important benefit that, or one of the most important benefits that, in view of all relevant facts and circumstances, can reasonably be expected from a construction, is to obtain a tax benefit.

Intermediaries

The directive obliges the member states to introduce legislation on the basis of which intermediaries, or (relevant) taxpayers, must spontaneously provide information about taxable cross-border constructions to the tax authorities. The reporting obligation is placed upon all actors (“intermediaries”) that are usually involved in designing, marketing, organising or managing the implementation of a reportable cross-border transaction or a series of such transactions, as well as those who provide assistance or advice. However, in certain cases, the reporting obligation would not be enforceable upon an intermediary due to a legal professional privilege.

Penalties

To improve the prospects for the effectiveness of the disclosure rules enacted in the local EU member states (tax) legislation, penalties are introduced in the local EU member states which should be effective, proportionate and dissuasive[4].

Entry into force

The intended date of entry into force of the measures contained in this bill is 1 July 2020 and they are applied for the first time with regard to cross-border structures subject to a reporting obligation, the first step of which has been implemented in the period from 25 June 2018 to 30 June 2020. This also means that transactions closed in this period or substantially modified during this period will be required to be reported before august 1, 2020.

What can we do?

These new reporting requirements affect each financial institution’s or intermediary’s procedures and workflows. As it will be very difficult to use the hallmarks as provided in the directive, guidance should be received on which transactions should or should not be reportable transactions. Also it will be difficult to establish the right format in which these reportable transactions should be reported[5]. Due to the current lack of guidance, the potential of breaching the disclosure rules and incurring penalties, it can be extremely useful to involve i-KYC in assessing the impact of DAC6 on your current operation. Getting closer to 1 August 2020 (the first reporting date) we can assist you furthermore in preparing a project plan, advice and training concerning the best way for you to approach the required information reporting. We have the breadth and depth of international structured tax knowledge and experience to provide tailored training courses to assist you in becoming DAC6-compliant.

[1] amending Directive 2011/16/EU as regards mandatory automatic exchange of information in the field of taxation in relation to reportable cross-border arrangements.

[2] In the Netherlands the WIB (Wet op de internationale bijstandsverlening bij de heffing van belastingen)  and AWR (Algemene wet inzake rijksbelastingen) have been amended.

[3] In some cases for cross-border structures, the first step of which has been implemented in the period from 25 June 2018 to 30 June 2020.

[4] The Netherlands has introduced a (maximum) €830.000 penalty for not adhering to the reporting obligations by an intermediary which can be enforced on each violation of the new disclosure rules.

[5] The Dutch authorities have stated that they will provide guidance with examples on when to report. This guidance is however not yet available.